The hype around DeFi is astonishing and it has captured the imagination of speculators and traders. However, DeFi protocols are incredibly difficult to understand and, as a result, we know very little about what type of trading strategies are possible in this new ecosystem. This session will discuss some ideas and data insights about trading strategies in DeFi protocols. From basic arbitrages to sophisticated quant, multi-protocol ideas , we will explore some theses that could be relevant to DeFi traders. Additionally, we will highlight some ideas around risk management and challenges that should be considered by anyone embarking in their DeFi trading journey.

1. Observations About DeFi
Trading Strategies: Hype,
Risks and Opportunities

2. Agenda
● New opportunities in DeFi quant strategies
● A new definition of risk for DeFi quant strategies
● Practical tips

3. This webinar
is about
discussing
new ideas….

4. A quick update about ITB

5. New Customers Have Gone Live
with Integrated ITB Analytics

6. 6
Upcoming Feature: DeFi Analytics

7. DeFi is becoming an important building
block of the crypto ecosystem

8. From a quantitative trading perspective,
DeFi introduces new opportunities but
also new notions of risk

9. Some observations about DeFi
trading strategies…

10. DeFi has created many short-term
alpha opportunities in the market

11. But how to think about long-
term opportunities?

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Three Unique Characteristics About DeFi that Influence
Quant Strategies
FULLY OBSERVABLE PROGRAMMABLE REGULARLY
INEFFICIENT

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Fully Observable
Trace and evaluate end to end trades
Accurately estimate profits and risks
prior to execution
Create effective trade simulations

14. 14
Programmable
Quant Strategies
Lending
Trade
Execution
Insurance
Risk
Management
…

15. 15
Regularly Inefficient
Traditional Markets DeFi

16. 16
The Evolution of Quant Opportunities in DeFi
Event-Driven
Ex: yield
farming
Speed of
Execution
Ex: DEX
arbitrage
Intelligence
Ex: Spot-Dex
arbitrage,
predictive
models
Size of Individual
Opportunities
Time

17. 17
An Oversimplistic Taxonomy of DeFi Quant Strategies
Single DeFi
Protocol
Strategies
Multi DeFi
Protocol
Strategies
CeFi-DeFi
Strategies

18. Practical DeFi quant strategies…

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Single-Exchange, Inter-Pool Arbitrage
• Identify price invariances between different pools in UniSwap
• Dispatch transactions that execute multiple-swaps across different liquidity pools

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Multi-Protocol Arbitrage
• Identify price invariances between UniSwap and Balancer pools
• Execute atomic transactions that arbitrage between the different protocols

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CeFi-DeFi Arbitrage
• AMPL circulating supply changes every day
• After changes, UniSwap and Coinbase update the price at different time intervals creating arbitrage
opportunities

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Ideas We are Exploring
Interesting ideas for DeFi quant strategies
Predictive
patterns in
AMMs
Predictive
models +
arbitrage
Smart
liquidity
providers
….

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Some Takeaways…
DeFi takes arbitrage to a new level
Concepts like automated market makers are here to
stay
Programmability and regular inefficiencies open the
door to a new universe of quant strategies
Opportunities expand to both active and passive
investors

24. Rethinking risk management in
DeFi quant strategies…

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Risk management in quant strategies(both alpha and
smart-beta) is based on portfolio theory concepts….

26. 26
DeFi strategies introduce new risk factors…

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Risk Factors in DeFi Strategies
Protocol failures
•Smart contracts in DeFi protocols can contain bugs that affect active strategies
Forks
•DeFi protocols can be forked creating fragmentation
Frontrunning
•Miners can front run many DeFi transactions
Liquidity Attacks
•DeFi protocols can trigger attacks targeted to diminish liquidity in a specific protocol
Cost of execution
•The cost of gas can translate into losses in many DeFi quant strategies
Decentralized governance manipulations
•Many DeFi protocols rely on decentralized governance models which can be subjected to manipulations
….

28. Practical risk mitigation in
DeFi quant strategies…

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Efficient Gas Management
● Detect predictive trends in gas
prices
● Build self-destructive smart
contracts that accumulate gas
during low trends
● Use that cheap gas to minimize
the cost of execution of DeFi
strategies in times when gas is
more expensive

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Some Takeaways…
DeFi strategies introduce new risk factors that fall
outside traditional finance…
DeFi requires a new methodology to evaluate risk…
Decentralized governance could be a wild factor from
the risk management perspective ..

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● DeFi offers new opportunities for quantitative trading strategies
● Strategies will evolve from event-driven, to high frequency to intelligent-edge
● DeFi strategies requires a new definition of risk
Summary

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33. INTRODUCING
Jesus Rodriguez
jr@intotheblock.io
medium.com/@jrodthoughts
intotheblock.com
Thank You!